Trading curbs, used to slow down the market in the event of a big move, were imposed by the New York Stock Exchange late this morning. Treasury bonds surged as investors sought safety, oil turned lower and gold slid.

Credit market fears, which prompted a selloff that dragged the Dow down 226 points Tuesday, again unnerved investors and put pressure on stocks. Higher oil prices also weighed on stocks early in the session as crude briefly climbed above $77 a barrel before turning lower. U.S. light crude for September delivery slid 72 cents to $75.16 a barrel in afternoon trading.

"People will be talking $80 a barrel crude soon - I think energy is the second largest concern [today]," said Kiddoo.

More disappointing news from the housing sector also weighed on investors. Homebuilders including D.R. Horton (down $0.76 to $16.72, Charts, Fortune 500) and Pulte Homes (down $1.14 to $19.53, Charts, Fortune 500), the nation's No. 2 and No. 3 builders, posted huge losses. And a bigger-than expected drop in new home sales in June added to those woes. The Commerce Department reported new home sales tumbled 6.6 percent.

The two big selloffs this week come just a week after the Dow hit another record, closing above 14,000 for the first time.

Peter Cardillo, chief market economist for Avalon Partners, said Thursday's steep selloff was probably a blip in the latest leg of the bull market.

"I don't see it as an end to the bull market, but maybe the end of the bull run," he said. "I think that the market needs to reassess some of the euphoria that took place recently."

Treasury prices surged, taking the yield on the 10-year note to 4.78 percent from 4.91 percent late Wednesday. Bond prices and yields move in opposite directions.

Market breadth was negative on heavier than normal volume. Losers topped winners by more than 10 to 1 on the New York Stock Exchange on volume of 1.56 billion shares. Decliners beat advancers 6 to 1 on the Nasdaq on volume of 2.08 billion shares.

The dollar fell against the euro and the yen.

COMEX gold for December sank $11 to $675.50.

Major Asian markets declined while European stocks finished sharply lower.